South Africa’s Carbon Tax: a Far-Sighted Move Towards a Greener World

5 April 2012, New York

South Africa announced in February 2012 that it will introduce a carbon tax to reduce the country’s high levels of greenhouse gas emissions and assist in the global effort to curb climate change. Substantive national mitigation policies have hardly been seen so far, especially in the developing world, and South Africa is one of the first countries to introduce one. A UN DESA Seminar on economic implications of introducing carbon taxes was held on 3 April 2012.

“South Africa has committed itself to a 34% reduction of its CO2 by 2020 and a 42% reduction by 2025, subject to international assistance. So far, we did not receive any help… We plan a 90% reduction of emissions in the electricity sector by 2025”, said Konstantin Makrelov, from the National Treasury of South Africa, at this event.

The seminar entitled “The Economics (and Politics) Behind South Africa’s Carbon Tax”provided a discussion forum on economic implications of introducing carbon taxes in the country, including its impact on GDP and employment.

Keynote speaker Konstantin Makrelov, from the National Treasury of South Africa, addressed several issues on “the Economic Implications of Introducing Carbon Taxes in South Africa”. He opened his lecture by questioning whether this carbon reduction policy was necessary, given South Africa’s dependence on carbon-intensive mining and heavy industry, which have long benefited from cheap coal-fuelled electricity production.

“South Africa’s electricity intensity is probably among the highest as compared to other countries” Konstantin Makrelov pointed out, “South Africa’s electricity contributes to 55 percent of its total emissions. This is because most of the South Africa’s electricity firms are using coal”.

Konstantin Makrelov also admitted the carbon tax would put pressure on some sectors in the short term. “The electricity price will probably rise by about 300% from 2007 to 2015” He seemed not that worried, though: “The impact on GDP will be fairly small. In 2025, there will be a very small decline in GDP growth, and if we have a consumption-based carbon tax, the impact on GDP will be even smaller.”

He also admitted that some industries in South Africa seemed unwilling to change. “They want a low cost change”, Konstantin Makrelov says. “How do we do with that? On one hand, if we move too fast, we may probably at some point lose political support, because of the structure cost or adjustment cost that would be brought to the economy on the short term. But, on the other hand, if we move too slowly, we may have no meaningful impact on the economy.”

“One of the most important thing when introducing a carbon tax is how to recycle the revenue. If the revenue is recycled efficiently, it is likely that the impact of the carbon tax to the economy will be much less negative and even positive, in certain cases. If it is used to boost the economy, investment etc., you can have a double or triple reward” he concluded.

Channing Arndt, Professor of Economics at the University of Copenhagen and leader of the climate change pillar at the World Institute for Development Economics Research at the United Nations University (UNU-WIDER) concluded that revenue recycling options do have trade-offs in terms of growth and equity. Higher carbon taxes lead to larger output and employment losses. He stated that recycling through VAT (sales) tax seem to be the strategy that has the smallest impact on income distribution.

South Africa seems to foresee a trend: mitigation policies could be implemented in more countries in the coming decades. Preemptive moves, such as introducing a carbon tax, would allow South Africa to be one of the first countries to start its transformation to a “greener” economy, and allow it to avoid being forced to rapidly reduce emissions in the future. James Thurlow, an economist at the World Institute for Development Economics Research at the United Nations University (UNU-WIDER), expressed the same idea at the end of the seminar: “we don’t really know where the mission of reductions will come down the road, and if the world is going to start de-carbonizing. Maybe South Africa should better start it first, relatively soon, so that it will not cost that much”, he said.